An extraordinary number of retirement investors find themselves asking “What is an ETF?” Extraordinary because many of them are investors in these funds, whether they realize it or not.

An ETF is an “exchange-traded fund.” These types of investments have been around since 1993, but they started being used significantly about a decade later. Currently, the net assets held by ETFs amount to $1.34 trillion; that compares to $14.72 trillion in total assets held through investment companies, most of it in mutual funds.

In 1976 the first index fund was launched by the investment firm Vanguard Group. It was known as “Bogle’s Folly,” for John C. Bogle, the founder of Vanguard. He believed that it was far more important to stay invested than to trade in and out. So, Bogle created a fund that tracked the S&P 500. It was the Vanguard 500 (VFINX). It promised to keep up with the broad index of stocks at a rock-bottom cost, and it still does.

You can think of an ETF as a form of index fund, in the sense that is has the same goal: To provide investors with a benchmark return at minimal cost. There is one important difference, however. Index funds are costly to trade, while ETFs often trade commission-free.

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